Monday, July 18, 2011

CIHLDG ... Jul11

CIMB Research Report.

Investment highlights
• Maintain BUY. News that Japanese beer maker Asahi is in talks to acquire CI Holdings’ (CIH) wholly-owned Permanis is a positive surprise, especially if the price tag turns out to be the reported US$200m (RM600m). This is 28% above CIH’s market cap, 8x what CIH paid for Permanis. It works out to an attractive FY6/12 P/E of 15x. We maintain our EPS forecasts and target price of RM4.78, which we
continue to peg to our target market P/E of 14.5x. This news could catalyse a rerating, along with CIH’s increasingly marketable product line. Even if this deal does not pan out, CIH will remain an attractive investment proposition at 9-11x FY12-13 P/Es. CIH remains a BUY and our top pick, not only for the F&B sector but also for our small-cap universe.

• Scenario 1: If the acquisition materialises. Should the acquisition by Asahi go through, CIH would be left with its sanitary fittings business. It may prompt management to look more aggressively into opportunities in the food segment. CIH’s MD and largest shareholder Datuk Johari Abdul Ghani has extensive experience in the food business, having been the MD of QSR Brands (QSR MK, Outperform) and its subsidiary KFC Holdings (KFC MK, Not Rated) before 2006 when Johor Corp took over the QSR group and put in its own management team.

• Scenario 2: If the acquisition does not materialise. In the event of no deal, CIH would remain a Buy for its own fundamentals 1) Market leadership – Tropicana has market leadership of the juice market with a 25% slice only three years after its launch. 2) An expanding product portfolio – A new non-carbonated drink, Tropicana Twister in lychee variant, was launched recently. In 3QFY11, non-carbonated drinks accounted for 43% of beverage sales compared with 20% a few years ago. CIH is aiming for a 50:50 sales split between carbonated and non-carbonated in the next few years. 3) Attractive valuations – CIH is trading at 9-11x FY12-13 P/Es.

Recent developments
Yesterday, Bloomberg reported that Japan’s biggest beer producer by sales volume, Asahi Group Holdings Ltd, is in talks with CIH to acquire the latter’s wholly-owned Permanis for about RM600m. Asahi is reportedly competing with another company to buy the beverage maker from CIH. The newswire added that a deal may be concluded in 4-6 weeks’ time.

Permanis has exclusive rights to bottle, distribute and sell drinks under the PepsiCo brand and other peripheral brands (i.e. Mirinda, Seven-Up and Mountain Dew) within Malaysia. It also manufactures its own drinks under various trademarks including Chill, Excel, Bleu and Shot.

Earnings outlook
A positive surprise. The report is a positive surprise as Permanis is in the position of a potential target, a reversal from recent years when its parent company took on more of the role of an acquirer as it scouted for a food business to complement its beverage business.

Potentially an attractive deal. We view the reported offer price of about RM600m as attractive on three counts:
• It is 28% above CIH’s market cap as at yesterday.

• It values Permanis’s business at 15x FY6/12 P/E, higher than our 14.5x target P/E for CIH whose bottomline is driven by Permanis. Permanis makes up 90% of our projected FY6/12 net profit of RM44.3m (RM0.31 per CIH share) for CIH. The remaining 10% comes from sanitary fittings. CIH’s wholly-owned Doe Industries Sdn Bhd is Malaysia’s leading manufacturer of chrome-plated brass taps, faucets, showers and other sanitary fixtures under the Doe brand.

• It works out to a whopping 733% premium over the RM72m price that CIH paid for Permanis in FY04. Permanis became a wholly-owned unit of CIH following a major restructuring at KFCH in which CIH had been the single largest shareholder prior to 1 Apr 04. PepsiCo could compete better with Coca-Cola. We believe that the final decision on the sale of Permanis will be in the hands of PepsiCo. While CIH has no doubt done an exemplary job in lifting Permanis’s sales and profile (Figure 1), PepsiCo may be looking for a stronger partner and platform in Malaysia and the region to better compete with Coca-Cola, which will start operating its 123,024 sq m bottling plant in Nilai by year-end. In a move that could change the landscape of the regional soft drinks segment, Coca-Cola will spend RM1bn in Malaysia – the company’s biggest
investment ever made in the country – over the next five years to boost its presence in Southeast Asia, which will heat up the already sweltering competition with PepsiCo.

Scenario 1: If the acquisition materialises. Should the acquisition by Asahi go through, CIH would be left with its sanitary fittings business. It may prompt management to look more aggressively into opportunities in the food segment. CIH’s MD and largest shareholder Datuk Johari Abdul Ghani has extensive experience in
the food business, having been the MD of QSR Brands and its subsidiary KFCH before 2006, when Johor Corp took over the QSR group and put in its own management team.

Scenario 2: If the acquisition does not materialise. In the event of no deal, CIH would remain a buy on its own fundamentals 1) Market leadership – Tropicana has market leadership of the juice market with a 25% slice only three years after its launch. 2) An expanding product portfolio – A new non-carbonated drink, Tropicana
Twister in lychee variant, was launched recently. It is Permanis’s fourth Tropicana Twister flavour after orange, apple and blackcurrant. In 3QFY11, non-carbonated drinks accounted for 43% of beverage sales compared to 20% a few years ago. CIH is aiming for a 50:50 sales split between carbonated and non-carbonated in the next few years. 3) Attractive valuations – CIH is trading at 9-11x FY12-13 P/Es.

Recommendation
Maintain BUY. Assuming that CIH sells Permanis at RM600m and does not reinvest the proceeds in a new business, we could be looking at a 6% dilution in our target price to RM4.50 based on SOP (Figure 3). We understand that all except RM5m of CIH’s RM124.5m borrowings relate to Permanis. For now, we maintain our EPS forecasts and target price of RM4.78, which we continue to peg to our target market P/E of 14.5x. This news could catalyse a re-rating, along with CIH’s increasingly marketable product line. Even if this deal does not pan out, CIH will remain an attractive investment proposition at 9-11x FY12-13 P/Es. CIH remains a BUY and our top pick, not only for the F&B sector but also for our small-cap universe.

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